On Monday 2 April, The Hartford Financial Services Group, Inc. (Baa3 senior debt rating, stable outlook) announced an agreement with Allianz SE (Aa3 insurance financial strength rating, negative outlook) to repurchase €1.3 billion of outstanding junior subordinated debt and the warrants acquired by Allianz SE in 2008. Allianz will receive from Hartford an aggregate consideration of €1.8 billion. This agreement is credit positive for Allianz. In addition to the capital gains generated by the repurchase, this will reduce the financial risk profile of the
insurer by reducing the counterparty risk to Hartford, as well as reducing the overall exposure to US financial institutions subordinated debts.
On 6th October 2008, Allianz undertook a capital investment of €1.8 billion in Hartford, comprising of (i) junior subordinated debentures with a nominal value of €1.3 billion and a 10 % interest coupon, (ii) warrants for 69 million Hartford shares and (iii) 6 million convertible preferred shares, which have been converted into 24 million shares of common stock in January 2009.
Although the assets to be repurchased were offering an attractive yield to Allianz (10% yield on the junior subordinated debt) which will be challenging to obtain on new investments, the transaction, if completed, will reduce the risks in Allianz's investment portfolio. In particular, this will reduce Allianz's investments in subordinated debts, which also include €2.1 billion of US banking subordinated debts and €8.4 billion (ie 1.7% of the investments portfolio) of total bank subordinated debts. In addition, the repurchase will reduce the counterparty risk to Hartford,
which will now be limited to around 5% of Hartford's shares. This reduction in investments risks will result in a decrease of the required economic capital (by around €1.5 billion). Nonetheless, the ultimate impact will depend on how Allianz will reinvest the cash proceeds of the transaction.
In addition to the reduction in risks, this agreement will generate capital gains for Allianz. However, given the size of the assets repurchased (0.4% of the investments portfolio) by Hartford, and the limited net financial impact on Allianz' balance sheet and income statement, we consider that this agreement does not impact Allianz' ratings.
The repurchase is expected to close on 17th April 2012, and remains subject to a successful consent solicitation to terminate a related replacement capital covenant entered into for the benefit of the holders of other notes issued by Hartford.
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